For this reason, listed housebuilders in the UK have teamed up to lobby the government to bring back a little-known instrument – a Mortgage Indemnity Guarantee or MIG – which they believe will help large numbers of first time buyers currently priced out of the housing market. If their mission is successful, it could boost sales levels and share prices across the housebuilding sector. However, critics argue that plugging the deposit gap through MIGs or shared equity schemes conceals the unpalatable truth – house prices are artificially expensive.
All the housebuilders concur that deposits are the biggest problem for first time buyers. Mortgage lenders will generally not advance above 70-75 per cent loan to value on new build purchases. The chancellor's decision to increase the stamp duty threshold to £250,000 a fortnight ago will help – but not much. The British Property Federation calculates this will shave just 18 months off the 18 years it would take a 25-year-old to save for the average £33,000 deposit that mortgage lenders require. So it's hardly surprising that housebuilders have responded by lending first time buyers deposits themselves.
Sharing the pain
Known as a shared equity deal, recent financial results from builders show that as many as one in four sales of new build homes rely on these "top up" loans to proceed. Housebuilders innovated early on with their own schemes, but now chiefly rely on the government-backed HomeBuy Direct scheme. Available only on specially designated plots, first time buyers are loaned 30 per cent of the property's value, with half coming from the housebuilder, and half from the government's Homes and Communities Agency (HCA).
Technically valid for 25 years, the loan is not repaid until the property is sold or refinanced, and there's no interest charge for the first five years. However, borrowers must repay 30 per cent of the market value of the property at the time it is sold or refinanced, rather than a fixed sum. The scheme has been criticised for its reliance on another boom in house prices to finance the eventual repayments, but in the short-term it is succeeding in getting first timers on the property ladder.
However, housebuilders are starting to question the medium-term sustainability of the model. As floating equity stakes tie up valuable working capital for an indefinite period, housebuilders maintain that MIGs could plug the equity gap in a more capital-efficient way.
